• The aggregate reported earnings of FBM KLCI 30 constituents totalled RM14.25b in 3QCY16, lower sequentially but higher on-year at -2.3%qoq and 19.6%yoy respectively.

• However, the aggregate normalized growth figures were higher sequentially at 3.0%qoq but slightly moderated on-year at 14.7%yoy.

• The 3QCY16 aggregate earnings slightly lagged expectation at 94.0% of our estimate.

• Within MIDFR Universe, 5% of stocks under coverage reported higher than expected earnings. Of the rest, 33% posted earnings that were lower than expected versus 62% which came within expectations.

• Target price changes involved 16 upward adjustments and 29 downward adjustments.

• We made 14 changes to our stock recommendations with 7 upgrades and 7 downgrades.

• We recently added AEON Credit Service, Cahya Mata Sarawak, Inari Amertron, Superlon Holdings and Tiong Nam Logistics Holdings to our universe and ceased coverage of Parkson Holdings and Protasco.

• Revised year-end 2016 FBM KLCI target to 1,700 points.

FBM KLCI

The aggregate reported earnings of FBM KLCI 30 constituents totalled RM14.25b in 3QCY16. The figure was lower sequentially but higher on-year at -2.3%qoq and 19.6%yoy respectively. However, the aggregate reported earnings figure requires some adjustments in order for the sequential and on-year growth numbers to reflect a fairer picture of the benchmark’s earnings performance.

The aggregate normalized 3QCY16 earnings of FBM KLCI 30 constituents were lower at RM13.80b. Some of the major non-operational items reported during the review quarter include (i) RM198m gain on disposals (mainly RM131m from disposal of property in Singapore and RM35m from disposal of 10% stake in E&O) by Sime Darby, and (ii) RM150m gain on the sale of Sun Life by CIMB.

After neutralizing the impact of non-operational items (3QCY16: -RM452m, 2QCY16: -RM1.20b, 2QCY15: +RM118m), the normalized sequential growth in 3QCY16 was higher at 3.0%qoq. While the normalized on-year growth number was slightly moderated at 14.7%yoy, nonetheless it was much superior to the tepid 0.5%yoy normalized growth performance of the preceding 2QCY16 quarter

It is notable that prior to the 3QCY16 earnings reporting season, the aggregate earnings of FBM KLCI constituents was estimated to come in at RM15.16b. On that score, basing on the actual results, the aggregate figure of RM14.25b accounted for 94.0% of our estimate.

MIDFR Universe

Under MIDFR Universe, we made 45 changes to our stock recommendations with 16 upgrades and 29 downgrades Moreover, target price changes involved 7 upward against 7 downward adjustments. Also, we recently added AEON Credit Service (M) Bhd, Cahya Mata Sarawak Bhd, Inari Amertron Bhd, Superlon Holdings Bhd and Tiong Nam Logistics Holdings Bhd to our universe and ceased coverage of Parkson Holdings Bhd and Protasco Bhd. Refer to Appendix 1 for company-specific details with regard to revisions in recommendations and target prices.

The percentage of companies within MIDFR Universe which registered earnings that came below our expectations risen to 33% in 3QCY16 from 23% in the prior quarter. Nevertheless, it is noteworthy that the percentage of positive surprises remained at 5% during the quarter under review vis-à-vis in 2QCY16

Accordingly, companies with results that were in line with expectations declined to 62% in 3QCY16 from 72% in the prior quarter. Refer to Appendix 2 for company-specific details with regard to the earnings outperformers and underperformers

Banking and Technology were the few sectors which recorded higher total earnings (as reported) in 3QCY16 when compared to both the preceding quarter and corresponding period last year. On the other hand, Automotive, Building Material, Consumer, Finance and Media sectors were those that showed negative sequential as well as on-year earnings (as reported) growth percentages in 3QCY16.

Overall results slightly lagged expectation

Prior to the just concluded earnings reporting season, the aggregate 3QCY16 earnings of FBM KLCI constituents were estimated to come in at RM15.16b. Hence, basing on the actual results, we thereby conclude that the 3QCY16 earnings of FBM KLCI constituents slightly lagged (i.e. more than -5ppts) our expectation as the aggregate figure of RM14.25b accounted for only 94.0% of our estimate.

Changes to estimates

The aggregate FY2016 earnings of the FBM KLCI constituents under our coverage were adjusted lower by -1.3% to RM53.58b vis-à-vis our earlier estimate pursuant to the prior reporting season. Likewise, the aggregate FY2016 earnings of the stocks under MIDFR coverage universe was also trimmed by -2.0% to RM69.30b vis-à-vis our earlier estimate pursuant to the prior reporting season. Refer to Appendix 3 with regard to changes in aggregate earnings estimates.

Revised FBM KLCI year-end 2016 target to 1,700 points

As the overall 3QCY16 results slightly lagged our expectation and couple with the cagey market sentiment due to the still unsettling Ringgit situation, we thereby revised our FBM KLCI year-end 2016 target (from 1,750 points) to 1,700 points. Nonetheless, we maintain our year-end 2017 target at 1,830 points.

The impetus for the FBM KLCI to rise from the curent levels of 1,620-1,630 points towards our revised year-end 2016 target of 1,700 points may come from an anticipated year-end rally. Recall in both Decembers of 2014 and 2015, despite against the backdrop of tumbling crude oil prices and a US Fed rate lift-off, the market benchmark advanced by 60-70 points during the final fortnight of the calender years. As in the previous years, we foresee a tendency for possible repeat of a year-end rally in 2016.

Source: MIDF Research - 2 Dec 2016